drone nation

In demand by Fortune 500 companies and heavily funded by Silicon Valley, unmanned aircraft are rapidly invading the world of business.

We’re taking the drone out for a spin. It’s a sun-drenched Friday in Indianapolis’s Broad Ripple neighborhood, and though it’s late afternoon the wind hasn’t picked up. Perfect flying conditions. T.J. Johnson, 29, co-founder and chief engineer of a local consumer drone startup called AirDroids, kneels on the untrimmed grass in the middle of a city park. He unzips a small black carrying case no bigger than a regulation football and extracts an almost-final version of his company’s sole product.

The Pocket Drone—a collapsible, three-rotor aerial vehicle—folds up small enough to fit in a backpack easily, but its three independent propeller motors are powerful enough to carry a GoPro camera. Johnson and his partners think it could be the first in a huge, new category of personal electronics—the small, easily portable flying robot that goes everywhere with you to capture overhead imagery on demand.

In a few swift motions, Johnson snaps the rotors into place and connects the battery. Stepping back a few paces to give the machine clear passage to the airspace above, he taps in some guidance “waypoints” onto the satellite image of the park displayed on his Android tablet. Then he gives the command to fly. The propellers whir to life, and the drone zips into the air with startling speed, hovering for just a moment directly overhead before streaking off to autonomously execute its flight plan. As we watch it soar, we’re updated on the drone’s progress via a female robotic voice emanating from Johnson’s tablet: “Waypoint one … waypoint two …”

Johnson’s company has achieved liftoff almost as quickly as his invention. Along with co-founders Timothy Reuter, 37, and Chance Roth, 40, Johnson developed a rough prototype of the Pocket Drone and put it on Kickstarter in January. The partners were hoping to raise $35,000. But they ended up getting $929,212 in just 60 days to produce roughly 1,800 drones. Pre-orders on the AirDroids site have pushed sales still higher, to some $1.2 million. “To do a million? We felt like we really had something here, but we were definitely surprised,” says Johnson, an engineering major in college who has a day job as an intellectual-property attorney. “None of us were expecting that kind of demand.”

AirDroids co-founder T.J. Johnson flying the company’s Pocket Drone. The Indianapolis startup has already received $1.2 million in orders for its compact UAVPhotograph by A.J. Mast for Fortune

AirDroids is just the tip of the propeller. Think of this as a Model T moment—when a new industry finds its commercial footing, and thereafter the world is never the same. The idea of unmanned aircraft as consumer devices or commercial tools is a relatively new one in the U.S. Drones, as they are more commonly known, own a place in the American public consciousness right next to the war on terrorism and America’s shadow conflicts in places like Pakistan and Yemen. Predator and Reaper drones—the hulking, matte-gray unmanned aircraft now synonymous with “drone strikes”—have loitered in foreign skies for decades. But five years ago consumer drones didn’t exist. Even two years ago, low-cost and easy-to-use commercial drones were largely the subject of futurism. Today the business world is on the verge of being swarmed by unmanned aircraft.

The global market for nonmilitary drones has already ballooned into a $2.5 billion industry, one that’s growing 15% to 20% annually. And that’s under the current law. One of the biggest potential markets for commercial drones—the U.S.—isn’t even open for business yet. At least not officially. While the use of unmanned aerial vehicles (UAVs) for commercial purposes is soaring in countries like Japan, Australia, France, and the U.K., the U.S. Federal Aviation Administration has yet to institute regulations governing the operation of commercial drones, and in the meantime it has issued a blanket ban prohibiting their use in nearly all endeavors. Further complicating things is the gray area in defining the difference between “recreational” drones (which aren’t restricted by the FAA) and commercial drones (which are). In September the FAA issued exceptions to six film companies to use drones, and it has approved their use to monitor oil operations in Alaska. Regulators aren’t expected to issue a full set of guidelines for at least another year.

Chart Source: Frost & Sullivan

But the buildout of the drone industry is racing along even as Washington dithers. Everyone from Fortune 500 companies to venture capitalists to startups is pouring vast amounts of money into the technology. Amazon, Google, and German shipping giant DHL have made headlines by experimenting with drones for deliveries. Facebook says it is developing a drone the size of a 747 that could fly for months at a time, beaming down wireless signals. Meanwhile, unmanned aircraft have already begun to gain traction in big businesses, ranging from agriculture to mining (see box below on “Five Industries Where Drones Are Taking Off”). The industry has even recently retained a Washington, D.C., lobbyist—funded in part by Google and Amazon—to make the case for drones on Capitol Hill. So, strictly legal or not, America’s drone revolution is already well underway. The question is not whether drones will have a real impact someday. Rather it’s, Which businesses will be the most disrupted? And which entrepreneurs and investors will make the biggest windfalls in the process?

Mark Heynen wants to make one thing perfectly clear: “We’re a data company, not a drone company,” he declares moments after we meet.

Heynen is the senior vice president of client operations for San Francisco commercial-drone startup Skycatch, a company whose business model is based on the manufacture and sale of drone hardware and software to commercial customers. So in that sense, his comment may seem counterintuitive. But it’s a refrain I heard repeatedly over several days while exploring the Bay Area’s burgeoning drone corridor.

Over the past 18 months, a host of drone startups have sprung up amid the region’s more traditional software companies. Many, like Skycatch, have recently closed major funding rounds and are starting to take on the sheen of proper Silicon Valley tech startups, moving into modern, open workspaces accented with reclaimed wood and high, exposed ceilings beneath which platoons of twenty-something coders perched at adjustable sitting/standing desks hammer away at their keyboards.

This UAV boom in the heart of techland makes a lot of sense once you realize that America’s drone industry is tied up inextricably with the ongoing explosions in data analytics and the so-called Internet of things—areas that Silicon Valley and the larger technology sector have a vested interest in developing. “For us, this is just another increase in step function in the sources of information we can work with,” says Aaron Levie, co-founder and CEO of enterprise cloud company Box, of the proliferation of commercial drones. “Where will the next trillion files be created? Broadly: the Internet of things. But UAVs in particular are going to be a massive source of that information.”

The rotors of a Pocket Drone prototype by AirDroids fold up for easy storage.Photograph by Stephen Lewis for Fortune

Drones have the unique ability to fly lower than manned aircraft and higher than cranes and other ground-based vehicles can reach. They offer everyone from film producers to civil engineers to open-air mining operations to individual photographers a wholly new perspective on the world below. Using multispectral sensors, they can capture data impossible for the human eye to see—like gas leaking from a pipeline and food crops suffering from lack of nitrogen—faster and at greater volume than has ever been possible in the past. Tapping into the ever-increasing power of the cloud, they can quickly produce high-resolution 3-D maps of vast geographic areas. It’s the data that many companies are after. Drones are just the means of getting it. “If we could get this data some other way, we would,” says Curt Smith, technology director for the information technology and systems office at BP, one of the only companies currently cleared by the FAA to use drones for commercial purposes in the U.S. “We do this because it allows us to do things that we couldn’t do before.”

Skycatch founder and CEO Christian Sanz launched his company last year after he spent two weeks using a drone he had built himself to shoot aerial photographs of a construction site. Sanz had approached the builders hoping to make a business case for drone photography, and it turned out they had a voracious appetite for images to track the project’s progress. Sanz walked away overwhelmed by the demand for affordable, high-quality aerial images. “Two weeks into it I couldn’t keep up,” says Sanz, chuckling at the memory. “I was disappointing people, and I was doing it for free.”

He decided to build a company around the idea of automating the process. So Sanz developed an industrial system that includes GPS-guided drones to capture imagery and automated ground stations that can charge and swap the drones’ batteries between flights. By the end of 2013, Skycatch had 10 clients buying the units at $100,000 apiece. The company closed a $13 million funding round in May—investors include Google ­Ventures—and Sanz says he is already working on a far more substantial Series B round.

Skycatch’s customers include construction industry giants like Clayco, DPR, Bechtel, and France’s Bouygues. But it also quickly found data-hungry customers in other industries such as mining (Rio Tinto) and energy (Chevron, First Solar) who are eager to exploit efficiencies made possible by regular and accessible overhead imagery and 3-D mapping. Skycatch says that it’s doubling the number of systems it sells each month. Drones are no longer just an experimental extravagance to many enterprises; increasingly they’re viewed as an operational necessity.

“There’s an ongoing shift from a focus on cost to a focus on the value of data,” says Jonathan Downey, founder and CEO of Airware, another San Francisco–based drone technology startup. Downey started Airware in 2011 to develop what amounts to a common operating system for drones—a set of software tools interfacing with an ecosystem of sensors that can be installed to make any unmanned aircraft interface-friendly with other drones within a company’s fleet.

“There’s this gray area with the rules,” says one entrepreneur. “But people are going ahead and using these things.”

Like Skycatch, Airware has gained a lot of momentum over the past year, raising $11.7 million in Series A funding in 2013 from backers including Andreessen Horowitz and Google Ventures and an additional $25 million in July. Also like Skycatch, Airware just moved into nice new digs in San Francisco’s SoMA neighborhood. And Airware also works with customers to apply drone technology to commercial ends. Which means, like Skycatch and almost every other company trying to develop the commercial-drone industry, Airware has a problem. As Downey says: “A [U.S.] customer can’t buy our product today and be legally compliant.”

In the 2012 FAA Reauthorization and Reform Act, Congress gave the FAA a mandate: Develop a process for integrating small unmanned aircraft systems (UAS) into the national airspace as well as a set of regulations to govern their use. The FAA plans to release a proposed set of rules by the end of this year, and after a period of review by industry and lawmakers the agency will issue finalized regulations sometime in the second half of next year. Drone makers are obviously eager for a resolution. Meanwhile, because the FAA lacks the manpower to police the entire national airspace at all times, many companies get away with flying their commercial drones until someone brings it to the agency’s attention, at which point a cease-and-desist letter goes out.

Over the past year the status quo has changed somewhat as money and commercial interests have aligned themselves behind the commercial-drone business. In August consumer-drone makers DJI, 3D Robotics, and Parrot teamed up with Amazon to form the Small UAV Coalition, hiring D.C. lobbying group Akin Gump to represent the industry on Capitol Hill (Airware, GoPro, and GoogleX have since joined the group). Elsewhere in Washington, D.C., a consortium of institutional investors and aerospace companies has assembled a $2.2 billion fund to invest in infrastructure critical to the safe integration of commercial drones into the national airspace and to advocate for commercial drones. The UAS America Fund, as the group is known, has already filed a lawsuit challenging the FAA’s blanket ban on small commercial drones with the hopes of creating some legal headroom for companies that simply want to conduct small-drone R&D flights while the FAA works on its broader regulations.

Looking down on the IRIS+ drone Photograph by Stephen Lewis for Fortune

“The big paradox is that this is all about safety, but in order to make this safe, companies have to test,” says Michael Drobac, executive director of the Small UAV Coalition and senior policy adviser at Akin Gump in Washington, D.C. “We don’t want to cede the opportunities to other nations when we have such a base of companies and innovators that are already at the cutting edge in this space. Let’s move forward responsibly, but let’s move forward.”

We can solve most of these problems with technology,” Jono Millin says of the FAA’s safety concerns. “We personally have the capability to solve so many of their problems.”

From a hill overlooking an expanse of salt flats in Menlo Park, Calif., Millin can see the future of commercial drones. Drones of all stripes will be extremely easy to use, he believes. They’ll be accessible from anywhere, no matter where they are flying. They’ll be extremely safe; both the authorities and the companies that specialize in helping their customers deploy their drones will be able to monitor what drones are doing in real time. And absolutely everyone will use them. No one will be able to afford not to.

Millin is the 28-year-old co-founder and chief of product at DroneDeploy, and along with co-founder Nick Pilkington he’s brought me to the very heart of Silicon Valley—Facebook’s sprawling headquarters are visible on the far side of the cracked, chalk-white flats—to see this future in action. The company flies almost weekly, Millin says, typically to give the team back in the office the chance to debug software and address issues brought up by the company’s two-dozen beta customers scattered across 10 U.S. states.

Those customers are mostly companies trying to figure out how best to integrate drone technology into their operations, Millin says. Nobody wants to be left behind. “People are going ahead and doing this,” he says. “There’s this gray area with the rules—and it is a messy gray area—but people are going ahead and using these things.”

With just nine full-time employees, DroneDeploy is still in its lean-and-scrappy phase. Its three founders launched the company out of a shared one-bedroom apartment in San Francisco. Its current office more closely resembles a loft in Bushwick, Brooklyn, than the flashy, polished workspaces that dot the surrounding area. There’s no reclaimed wood to be seen, no brightly painted conference rooms full of beanbag chairs, nothing in the way of Silicon Valley swagger—just a group of twenty-somethings intensely focused on their computer screens.

FIVE INDUSTRIES WHERE DRONES ARE TAKING OFF
—Data provided by drones is transforming industries across the spectrum, often in surprising ways.

A worker for BP using a drone to image and map oilfields near Prudhoe Bay, AlaskaPhoto courtesy of AeroVironment

Unmanned aircraft have long promised to provide critical information and unlock efficiencies across industries, but we’re only beginning to see just how large an impact that data can have as companies find new and often unexpected applications for drone technology. “This usually starts when people perceive the benefit of not hiring an aircraft for something,” says Mark Heynen, senior vice president of client operations at commercial-drone maker Skycatch. “But it quickly trickles into other places.” —C.D

Agriculture: / New sensors and data analytics are taking precision agriculture beyond simply monitoring crops for stress. Imagine farmers boosting crop yields by optimizing the fertilizer mix for different parts of a field, or wine­makers precisely controlling drip irrigation down to the individual vine.

Construction: / On large-scale construction sites it can be extremely difficult for contractors to get the big picture. Drones make it simple for construction giants like Bechtel and DPR to monitor progress and supply stockpiles on a day-to-day basis.

Energy: / The energy industry uses drones for applications far beyond pipeline and flare stack inspection. In Alaska, BP uses drones to monitor its gravel-extraction activities to stay within environmental guidelines.ConocoPhillips has used unmanned aircraft in the Arctic, and Chevronhas experimented with them as well. First Solar employs drones regularly to inspect for faulty solar panels.

Mining: / Mining giants like Rio Tinto are reducing risk to their human workforce by using drone technology to detect potential landslides and inspect safety infrastructure, as well as to keep a more accurate eye on how much mineral it extracts.

Film and Television: / Several American TV and film production companies recently received FAA clearance to fly ­camera-equipped drones in U.S. airspace, offering major Hollywood studios such as 20th Century Fox and Warner Bros. the opportunity to leverage this technology on home soil—something they’ve done for years in other countries. Drone technology will bring much of that overseas shooting back to the U.S.

Millin, Pilkington, and CEO and co-founder Mike Winn attended high school together in their native South Africa and were scattered around various cities in the U.K. in mid-2012 when they decided that a long-simmering idea they’d shared had finally come into its time. “If we tried to build DroneDeploy five years ago, it wouldn’t have been possible,” Winn says. Now it appears that the timing couldn’t be better.

Winn left a job building sales tools at Google while Millin and Pilkington—pursuing doctorates at the University of Edinburgh and Cambridge, respectively—abandoned their studies to develop a piece of hardware roughly the size of a deck of cards. Called a CoPilot, it’s essentially a 4G/LTE wireless modem that interfaces with a drone’s onboard systems, feeding data to the autopilot and offloading images and other data from the drone’s sensors via existing wireless networks.

The big idea can be summed up in three words: drones as phones. By routing the control system for drones over the existing wireless communications infrastructure, DroneDeploy’s technology eliminates the need for unwieldy ground stations for downloading data, say the founders. Data go directly to the cloud for processing, users can access drones from anywhere, and companies can scale their drone operations using Verizon or AT&T’s infrastructure instead of buying or building their own.

Integrating drones into existing communications infrastructure is what allows Millin, Pilkington, and me to stand around eating salted almonds while a white, Styrofoam-body airframe loops back and forth across the sky overhead. Before sending the aircraft skyward, Millin dialed in the flight path from his smartphone. But twice during the half-hour flight one of the company’s programmers back in the office sends us a text to let us know he’s making small adjustments via DroneDeploy’s dashboard software. The whole office is watching this flight and the data streaming directly from aircraft to cloud, Millin says; technically we’re there only to launch and recover the drone itself.

This kind of simplicity is what will make commercial drones safe, Millin says. It would be simple enough to beam our flight plan to the FAA for approval and check it against a database of other flight plans or restricted airspace in the area. This type of automation is also what should pave the way for drones to penetrate all kinds of enterprises. While we’re having a snack, the robot is compiling 10 acres’ worth of high-resolution mapping data, and depending on what’s being mapped, that data can be extremely valuable.

The high value of data continues to drive companies toward drone technologies, but the FAA’s ban on commercial-drone use means that much of the rush toward drone adoption is happening in the shadows. Airware’s Downey has plenty to say about his company’s customers in Australia, France, and elsewhere in Europe, but on the subject of potential U.S. clientele he simply notes that the company is focused internationally. DroneDeploy’s founders openly admit that they have users across the U.S.—companies that are experimenting with commercial-use cases for UAS technologies if not using them for direct commercial gain—but the company is not saying who those customers are. Skycatch provides technology to some of the most recognizable global brands in open-air mining, construction, and energy, and Sanz is candid about the fact that his company’s technology is deployed regularly by companies right in the Bay Area, but he won’t go into specifics.

“Where will the next trillion files be created?” says Box CEO Aaron Levie. “[Drones] are going to be a massive source of that information.”

Many of those companies won’t have to fly under the radar much longer. As the FAA has scrambled to deal with both the proliferation of small-drone technology and pressure from various industries and interest groups to relax its commercial-drone ban, the agency has devised a mechanism that allows it to exempt specific companies and aircraft from its own rules. The first so-called Section 333 exemption was granted earlier this year when BP was given permission to fly one single kind of drone aircraft system for commer­cial purposes in the airspace over Prudhoe Bay, on Alaska’s northern, Arctic shore—an exemption far too narrow in scope to really move the needle for the larger drone industry.

But in late September the FAA gave out a second exemption under Section 333, this time granting a consortium of film and television production companies permission to use a number of different drone platforms across the TV and film industries. Aside from being the first move by the FAA to open up commercial-drone use across an entire industry, it established a process within the FAA for evaluating and implementing exemptions for companies that can prove that their drone operations are safe and reliable. That bodes well for drone entrepreneurs. More than a dozen industries—ranging from construction to agriculture to energy to electric utilities—have Section 333 requests waiting in the FAA’s pipeline, many of which are due for review before the end of the year.

Some drone makers are simply avoiding legal issues by exploiting demand for recreational drones, which remain largely unregulated by the FAA. Hong Kong–based DJI claims to own a full 50% of the recreational market, selling 30,000 or more of its now ubiquitous Phantom quadrotor drones every month. If DJI’s claims are true, that values the consumer drone market at roughly $800 million, though some in the industry value it as high as $1 billion (the disparity arises from what one considers a “consumer drone” product).

Chris Anderson, the former editor-in-chief of Wiredmagazine and co-founder and CEO of Berkeley-based 3D Robotics, which last September closed on $30 million in Series B funding, is one of those who see a much larger consumer market. 3DR makes off-the-shelf drones that are designed to be customized by the user—unmanned aircraft that sit somewhere between the consumer and hobbyist spaces. The underpinning technology could be—and will be—leveraged into commercial-drone tools in the future, Anderson says. “We’re seeing the convergence of the consumer and commercial markets,” he says. “And consumers are leading this market in terms of technology and in terms of adoption.”

Back in Indianapolis, the AirDroids drone returns from its programmed circuit and sails in for a smooth landing a few feet away. Johnson turns and shrugs, squinting into the drooping sun, almost bored. “So that’s it,” he says.

For the moment, AirDroids is still very much a startup. Johnson is tinkering with the design of the second-generation Pocket Drone in his basement. But the company’s potential market is expanding daily. Consumers looking for a small, affordable, and easy-to-use photography drone are behind the overnight success of AirDroids. And the current customers are the earliest adopters. Johnson’s co-founder Reuter says he expects sales to increase once the first units of the Pocket Drone, which costs $599, begin shipping all over the world in November. There is the potential for exponential growth—both for AirDroids and the drone industry overall. “These are established technologies with no established brands,” Reuter says. “There’s an opportunity to grab a lot of mind share.” And a lot of profits too.

by Clay DillowThis story is from the October 27, 2014 issue of Fortune.